Working as a freelancer can be a great experience. You have the chance to work as much — or as little — as you want. For more than a decade, I’ve been fortunate that making a little extra money is as simple as writing one more article. My first year of freelancing allowed me to earn enough money to pay rent while staying home with my toddler. While it wasn’t a huge amount, it was great to be able to take care of some of our needs.
And then tax day arrived.
Freelancing and Self-Employment Tax
That first year, I hadn’t set aside money to pay quarterly taxes. I didn’t even realize it was a thing. When I prepared our taxes, I discovered, too, the fact that freelancers like me have to pay both sides of payroll taxes. This is often referred to as the self-employment tax, and that year it amounted to 15.3 percent.
It’s true that you get a tax deduction for a portion of your self-employment tax, but that doesn’t totally erase the sting. And my little family still ended up owing more than $4,000 in federal taxes. For some freelancers, that wouldn’t have been a big deal. But for our fledgling family, newly moved across the country so my then-husband could work on his Ph.D.? It was devastating.
I didn’t know about the IRS payment plan, so what we owed went onto credit cards.
More on Filing: How Much Is Self-Employment Tax on $50,000 in Every State?
However, I learned from that experience. I realized that I needed to set aside money for taxes each month, and started taking 25 percent of my freelance income and putting it into a high-yield savings account. I also learned about the ability to pay on a quarterly basis and started making appropriate tax payments at that time.
After my husband was hired on as a graduate assistant, we withheld extra money from his paycheck as well, just to make sure that we didn’t end up in a situation that resulted in a hefty tax bill.
It worked. We stilled owed federal taxes the following year, but only about $100.
What About State Taxes?
Though my federal taxes were squared away for that year, I hadn’t planned for everything. That first year, we didn’t owe state taxes. However, the second year I freelanced, there was a significant increase in my income. Because I had set aside money for quarterly taxes, planning for my federal tax bill, I thought I was covered.
Then we looked at the state tax bill.
Once again, we had underestimated taxes and we owed a couple thousand dollars. Though some states require quarterly tax payments, not every state expects them. So, we just went along, paying federal quarterly taxes, and thought nothing of state taxes.
Again, I didn’t think about a payment plan. It didn’t even occur to me to call the state and ask if they had an option. We just put what we owed on the very credit cards we’d just paid off after the federal tax blunder.
Prepare Yourself: What Do I Need to File Taxes? A List of All The Documents to Have
Since that day, I’ve learned to also account for state taxes. And, in some places, there are county income taxes, as well. When I lived in Pennsylvania, our county levied its own tax on top of state and federal taxes. You might even pay city-related taxes. If you live in New York City, you’re familiar with that reality.
Today, I live in a state with a relatively low income tax rate and I plan for federal taxes each year. I don’t have to worry about county and city income taxes, but if I move again, I’ll be sure to look up the local tax laws as soon as I move in.
I don’t want to be caught unprepared again.
Click through to read a complete guide to independent contractor taxes.
More From Our Smart Money Squad
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- Watch: How to Legally Cheat Your Tax Bracket
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